Deck 7: Financial Assets

Question 1

What is a financial asset?

A)An asset that has a fixed or determinable cash flow.
B)Assets such as land and buildings that generate future cash flows.
C)An asset arising from contractual agreements on future cash flows.
D)An asset that does not generate future cash flows.

Answer 1

C

Question 2

Identify whether each of the following items is a financial asset:

Answer 2

Question 3

Which item is an example of a financial asset?

A)Share certificate of a public company.
B)Land.
C)Inventory.
D)Equipment.

Answer 3

A

Question 4

Explain the difference between a joint arrangement,joint control,joint operation and a joint venture.

Question 5

Which statement is correct about an equity instrument?

A)A contract whose value changes according to a specified variable,requires little or no initial investment and is settled at a future date.
B)A contract that gives the holder the residual interest in an entity after deducting all of its liabilities.
C)Any contract that entitles the holder to joint interest in an entity after deducting all of its liabilities,and is settled at a future date.
D)Any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

Question 6

Explain the difference between a joint arrangement,joint control,joint operation and a joint venture.Explain how each type of investment is accounted for under IFRS.Explain the underlying reasons for the difference in accounting methods for these investments.

Question 7

Explain the characteristics of a financial asset.Discuss if cash has the characteristics of a financial asset.Why is (or is not)cash a financial asset?

Question 8

Which item is an example of real property?

A)Land.
B)Equipment.
C)Inventory.
D)Accounts receivable.

Question 9

Which statement is correct about financial instruments?

A)A contract whose value changes according to a specified variable,requires little or no initial investment and is settled at a future date.
B)A contract that gives the holder the residual interest in an entity after deducting all of its liabilities.
C)Any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.
D)Any contract that entitles the holder to joint interest in an entity after deducting all of its liabilities.

Question 10

Which statement is correct about derivative instruments?

A)Any contract that entitles the holder to joint interest in an entity after deducting all of its liabilities.
B)A contract whose value changes according to a specified variable,requires little or no initial investment,and is settled at a future date.
C)Any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.
D)A contract that gives the holder the residual interest in an entity after deducting all of its liabilities.

Question 11

Describe the single most important characteristic of a financial asset that distinguishes it from a real asset.

Question 12

Explain what financial assets are,how they differ from other types of assets,and why there is a variety of measurement standards for different categories of financial assets.

Question 13

Identify whether each of the following items is a financial asset:

Question 14

Explain the difference between a joint arrangement,joint control,joint operation and a joint venture.Explain how each type of investment is accounted for under IFRS.

Question 15

Victoria purchases a hotel with 100 similar rooms.To help finance this purchase,Victoria sells these rooms to individual investors for $200,000 each.An investor who owns a single room receives 55% of 1% of the revenue of the hotel (i.e. ,0.55%),while the hotel retains the other 0.45%.An investor who wishes to liquidate his/her investment may sell his/her room back to Victoria for the original $200,000,but cannot otherwise sell the room to other parties.
Identify all the financial assets involved in the above situation.

Question 16

Which of the following is correct about joint operations?

A)Joint operation is not a type of joint arrangement.
B)Joint operation is the same as a joint venture.
C)Proportionate consolidation is used for a joint operation.
D)Equity method of accounting is used for a joint operation.

Question 17

Which statement is correct about debt instruments?

A)A contract whose value changes according to a specified variable.
B)A contract that gives the holder the residual interest in an entity.
C)A contract that gives the holder joint interest in an entity.
D)A contract that is not an equity instrument or a derivative.

Question 18

Which item is an example of a real asset?

A)Share certificates.
B)Building.
C)Bonds.
D)Accounts receivable.

Question 19

Eastern Company contributes $5 million while Western Company contributes management expertise toward the creation of a joint venture called Ying.Ying purchases a building and obtains a mortgage to finance the purchase.The joint venture renovates the building with the help of contractors,who are paid 25 days after they render their services.After completion of renovations,Ying operates the building as a hotel.It also sells some of the rooms to individual investors.As a part of the purchase of each room,an investor has rights to 30% of the revenue from the hotel room purchased,while Ying retains 70% to cover operating costs.
Identify all the financial assets involved in the above situation.

Question 20

Explain why there is no one single measurement basis that is suitable for all financial assets.Does this mean that a company can choose any measurement base for any investment?

Question 21

Explain the meaning of and give an example for the following categories of financial instruments: equity,a derivative,or debt.

Question 22

Classify each of the following items into one of the seven categories of financial assets relevant for financial reporting purposes.Select the category that best suits the situation given.

Question 23

For financial reporting purposes,financial assets can be put into one of seven categories: subsidiaries,joint ventures,associates,at fair value through profit or loss,at fair value through OCI,amortized cost,and joint operations.For each of the following items,identify the possible categories into which it can be placed.More than one category is possible for an item.

Question 24

Based on the following information,what amount will be presented for "equity" on the consolidated balance sheet of Investor for its wholly owned subsidiary?

A)$100
B)$300
C)$600
D)$700

Question 25

Which statement is not correct about "control"?

A)Control is presumed when an entity has more than 50% of the voting power of the investee.
B)Having control allows the entity to direct the strategic operations of the investee.
C)Control is presumed when an entity owns more than 50% of the investee.
D)Consolidation is used when an entity has control over the investee.

Question 26

Classify each of the following items into one of the seven categories of financial assets relevant for financial reporting purposes.Select the category that best suits the situation given.

Question 27

Which statement is not correct?

A)At fair value through profit or loss investments are carried at fair value.
B)At fair value through OCI investments are carried at fair value.
C)Amortized cost investments are carried at fair value.
D)Investments in equity instruments cannot be classified at fair value through OCI.

Question 28

Which of the following statements is TRUE about the equity method of accounting?

A)This method is used when the investor has no influence over the associate.
B)This method is a condensed consolidation that shows the investor's share of the net assets and net income of the investee.
C)This method record dividends from the associate as income from operations.
D)This method has the same accounting impact as the amortized cost method.

Question 29

Which statement is correct about joint arrangements?

A)IFRS distinguishes between joint operations and joint ventures.
B)IFRS uses the terms joint operations and joint ventures inter-changeably.
C)IFRS permits either the proportionate consolidation method or equity method.
D)IFRS permits only the equity method.

Question 30

Which statement is correct about a financial instrument?

A)An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity.
B)An arrangement where one entity governs the financial and operating policies about another entity.
C)A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties.
D)An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

Question 31

Which statement is correct about joint arrangements?

A)An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity.
B)An arrangement where one entity governs the financial and operating policies of another entity.
C)A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties.
D)An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

Question 32

Which statement is correct about an associate?

A)An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity.
B)An arrangement where one entity governs the financial and operating policies about another entity.
C)A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties.
D)An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

Question 33

What is the meaning of "control"?

A)The power to participate in the financial and operating policy decisions of the investee.
B)The power to govern the financial and operating policies of an entity.
C)The power to share in strategic decisions affecting an entity.
D)The power to sell the shares of an entity.

Question 34

What is a "subsidiary"?

A)An entity where unanimous consent is required by the owners.
B)An entity that is controlled by another entity.
C)An entity over which the investor has the ability to participate in decisions affecting the entity's operations.
D)An entity that sells shares to the public.

Question 35

Which statement is correct about subsidiaries?

A)An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity.
B)An arrangement where one entity governs the financial and operating policies about another entity.
C)A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties.
D)An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

Question 36

For financial reporting purposes,financial assets can be put into one of seven categories: subsidiaries,joint ventures,associates,at fair value through profit or loss,at fair value through OCI,amortized cost,and joint operations.For each of the following items,identify the possible categories into which it can be placed.More than one category is possible for an item.

Question 37

For each of the following financial asset classifications shown in the left column,identify the combinations of (i)the type of financial instrument in the middle column that can be put into that classification and (ii)the business model that would lead to that classification.

Question 38

Based on the following information,what amount will be presented for current assets on the consolidated balance sheet of Investor for its wholly owned subsidiary?

A)$300
B)$500
C)$550
D)$1,050

Question 39

Based on the following information,what amount will be presented for "investment in investee" on the consolidated balance sheet of Spenser for its wholly owned subsidiary?

A)$0
B)$200
C)$300
D)$600

Question 40

Elyse Inc.made the following investments during its 2016 fiscal year.
a.The company places $3,000 in a 8-month term deposit with its bank.
b.The company purchases from its broker a call option on 2,500 shares of BMO Financial,a publicly traded company,for $5,500,in anticipation of an increase in the stock price.
c.The company buys 30% of the outstanding shares of NEXT Corp.The purchase was made in anticipation of a bid by BEFORE Corp.to purchase all of the shares of NEXT within the next nine months.
d.The company buys $35,000 of shares in a publicly traded corporation with a market capitalization of more than $20 billion.
Required:
Identify how the company should categorize the above financial assets.Briefly explain the reason for the classification.

Question 41

Kings has a 40% joint operation interest in Fisher.Based on the following information,what amount will be presented for "revenues" on Kings' proportionately consolidated income statement?

A)$1,000
B)$1,800
C)$2,000
D)$3,000

Question 42

What is a "joint arrangement"?

A)An entity where unanimous consent by the owners for all decisions is required.
B)An entity that is controlled by another entity.
C)An entity over which the investor has the ability to participate in decisions affecting the entity's operations.
D)An entity that sells shares to the public.

Question 43

Which statement is not correct about strategic investments?

A)Proportionate consolidation is used for joint ventures because of the presence of joint control.
B)Proportionate share of the investee's assets is included in the joint venturer's balance sheet.
C)Consolidation effectively results in two legal entities being reported as one economic unit.
D)The fair value through profit or loss method is used for strategic investments.

Question 44

Which statement about investments is not correct?

A)An at fair value through profit or loss investment is a non-strategic investment.
B)An investment in an associate is a strategic investment.
C)An at fair value through OCI investment is a strategic investment.
D)An investment for which the business model is to collect the contractual cash flows of principal and interest is a non-strategic investment.

Question 45

Kings has a 40% joint operation interest in Fisher.Based on the following information,what amount will be presented for "income from Fisher" on Kings' proportionately consolidated income statement?

A)$0
B)$160
C)$400
D)$710

Question 46

Starts has a 60% joint operation interest in Fish.Based on the following information,what amount will be presented for current liabilities on Starts' proportionately consolidated balance sheet?

A)$550
B)$470
C)$350
D)$200

Question 47

Which statement is not correct about the equity method?

A)The investment account on the balance sheet equals the original cost plus the investor's share of the investee's post-acquisition changes in net assets.
B)This method results in reflecting two legal entities as one economic unit for financial reporting purposes.
C)Income is recognized equal to the investor's share of the investee's net income.
D)Dividends from the investee are deducted from the investor's investment account.

Question 48

Philips has a 50% joint operation interest in Josef.Based on the following information,what amount will be presented for current assets on Philips' proportionately consolidated balance sheet?

A)$500
B)$550
C)$775
D)$1,050

Question 49

Philips has a 50% joint operation interest in Josef.Based on the following information,what amount will be presented for net income on Philips' proportionately consolidated income statement?

A)$200
B)$550
C)$750
D)$1,150

Question 50

On January 1,2017,Ella Ltd.purchased 25% of the common shares of JB Inc.for $2,200,000.In 2017,JB reported net income of $280,000 and paid dividends of $100,000.
Required:
a.Which of the following conditions must be met for Ella to use the equity method to report its investment in JB?
i.Ella owns at least 20% of the voting shares of JB.
ii.Ella has control over JB.
iii.Ella has a significant interest in JB.
iv.Ella is able to exercise significant influence over JB.
b.How much income would be reported by Ella in 2017 related to its investment in JB under the equity method?

Question 51

Which statement is not correct about "joint arrangements"?

A)Joint arrangements usually have a limited life and a defined set of objectives or activities.
B)A joint arrangement is the same as a partnership for financial accounting purposes.
C)Unanimous consent for all decisions is required of all parties.
D)There is a contractually agreed sharing of control over economic activities.

Question 52

Explain the nature of and the appropriate accounting treatment for investments in subsidiaries,joint ventures,and associates.

Question 53

How does having significant influence over an investee alleviate information asymmetry?

Question 54

What is an "associate"?

A)An entity where unanimous consent over decisions is required by the owners.
B)An entity where the investor can exercise unilateral control over the decisions of the investee.
C)An entity where the investor has the ability to participate in decisions affecting the investee.
D)An entity that cannot sell shares to the public or issue debt in the marketplace.

Question 55

What is the meaning of "significant influence"?

A)The power to participate in the financial and operating policy decisions of the investee.
B)The power to govern the financial and operating policies of an entity.
C)The power to share in strategic decisions affecting an entity.
D)The power to sell the shares of an entity.

Question 56

Accounting standards provide for a variety of different measurement bases for different types of financial assets.IFRS has several measurement bases,namely:
• consolidation
• fair value with changes through income
• proportionate consolidation
• fair value with changes through other comprehensive income
• equity method
• amortized cost
Required:
a.Explain why reporting entities should,on the one hand,use consolidation,proportionate consolidation,and the equity method for investments in subsidiaries,joint ventures,and associates,but on the other hand,use the fair value method for equity investments that are at fair value through profit or loss or at fair value through OCI.
b.Explain,for investments in debt securities,why measurement at amortized cost is more appropriate for debt investments for which the business model is to collect contractual cash flows,but one of the fair value methods is more appropriate for investments for which the business model includes an intent to profit from changes in value of the investment.
c.Explain why it is appropriate for changes in fair value to flow through income when the investment is classified as at fair value through profit or loss,but the same changes in fair value flow through other comprehensive income when the investment is classified as at fair value through OCI.

Question 57

Invest Up Hardware operates a chain of hardware stores.Recent operations have been stable and profitable,resulting in a significant amount of cash inflows.During the past fiscal year ended December 31,the company made a number of investments,as described below.
a.Invest Up bought 30,000 shares of Machine Mart,a supplier of equipment for construction and renovations.With in-depth knowledge of the hardware retailing business,Invest Up's management believes that Machine Mart's shares are undervalued and that the company could make a quick profit selling the shares within the next 12 months.Invest Up purchased the shares at $18 each,and received $0.30 per share dividends during the year.The shares traded at $29 at the fiscal year-end.
b.The company purchased 12,000 units of a mutual fund which cost $28 each.Management had no specific trading intentions for this investment;rather,it was a means of parking excess cash.At the end of the year,the units had a quoted market value of $24.
c.At the beginning of the year,Invest Up bought 25% of the common shares in Builder Bee,one of its smaller suppliers,for $6 million.These shares had a fair value of $6.6 million at the end of the year.During the year,Builder Bee reported net income of $1,500,000 and paid total dividends of $10,000
Required:
Determine how Invest Up should report the above investments in its financial statements.Include both the effects on the balance sheet and the statement of comprehensive income.

Question 58

What is the meaning of "joint control"?

A)Ability to participate in the financial and operating policy decisions of the investee.
B)Ability to govern the financial and operating policies of an entity.
C)The power to share in strategic decisions affecting an entity.
D)Ability to sell the shares of an entity.

Question 59

Which statement is not correct about "associates"?

A)Holding 18% of the voting power of the investee may mean significant influence exists.
B)The ability to exercise significant influence over the investee mitigates moral hazard.
C)The ability to exercise significant influence over the investee mitigates adverse selection.
D)Significant influence is presumed if 51% of the voting power of the investee is held.

Question 60

How would a short-term investment in bonds to earn a return on funds that would otherwise be held as cash be classified.

A)Amortized cost.
B)At fair value through profit or loss.
C)At fair value through other comprehensive income.
D)Associate.

Question 61

Fisher Corporation has the following investments at September 30,2016:

What method of accounting can Fisher not use to account for its investment in Cookstown?

A)Amortized cost.
B)Equity method.
C)Fair value through other comprehensive income.
D)Fair value through profit or loss.

Question 62

Which statement is correct about an at fair value through profit or loss investment?

A)The investment is recorded at fair value.
B)Changes in fair value are recorded in OCI.
C)The investment is recorded at amortized cost.
D)The category cannot include debt instruments.

Question 63

How should derivatives be classified?

A)At fair value through profit or loss.
B)Amortized cost.
C)At fair value through OCI.
D)Proportionate consolidation.

Question 64

Which financial asset classification best describes the business model that includes acquiring portfolio investments in debt securities with the intent to collect contractual cash flows to which it is entitled and profit from the change in value?

A)Associate.
B)Amortized cost.
C)At fair value through other comprehensive income.
D)At fair value through profit or loss.

Question 65

What factor is the most important in classifying an investment at fair value through other comprehensive income?

A)Whether the instrument is a derivative instrument.
B)Whether management intends to sell the instrument shortly after purchase.
C)Whether gains will be realized in the next operating cycle.
D)Whether the instrument has a fixed maturity date.

Question 66

Fisher Corporation has the following investments at September 30,2016:

What method of accounting will Fisher use to account for its investment in Brooke,if the intent of the business model is to hold the investment for the purpose of collecting contractual cash flows of principal and interest?

A)Amortized cost.
B)Equity method.
C)Fair value through other comprehensive income.
D)Fair value through profit or loss.

Question 67

What should an investment in a debt instrument be classified as when the business model does not include an intent to trade it?

A)Associate.
B)Amortized cost.
C)At fair value through OCI.
D)At fair value through profit or loss.

Question 68

Which financial asset classification best describes the business model that includes acquiring portfolio investments with the intent to trade them for a profit?

A)Associate.
B)Amortized cost.
C)At fair value through other comprehensive income.
D)At fair value through profit or loss.

Question 69

Fisher Corporation has the following investments at December 31,2016:

If Fisher classifies its investment in Brooke at amortized cost,what amount will be reported in Fisher's 2016 year-end balance sheet?

A)$10,000
B)$11,000
C)$12,000
D)$12,500

Question 70

Which statement is correct about an at fair value through OCI investment?

A)The investment is reported at historical cost.
B)Changes in fair value are recorded in OCI.
C)These investments are acquired exclusively for selling in the near term.
D)Changes in fair value are recorded in income.

Question 71

Satellite Corporation has the following investments at December 31,2016:

If Satellite irrevocably elected to classify its investment in Davenport at fair value through OCI,what amount will be reported for the investment at September 30,2016?

A)$1,000
B)$18,000
C)$19,000
D)$20,000

Question 72

Fisher Corporation has the following investments at September 30,2016:

What method of accounting will Fisher use to account for its investment in ABC,if this investment is held for trading purposes?

A)Amortized cost.
B)Equity method.
C)Fair value through other comprehensive income.
D)Fair value through profit or loss.

Question 73

Which investment could be classified at amortized cost?

A)Equity instrument.
B)Debt instrument.
C)Derivative.
D)Associate.

Question 74

Fisher Corporation has the following investments at September 30,2016:

What method of accounting will Fisher use to account for its investment in Brooke,if the intent of the business model is to hold the investment for the purpose of collecting contractual cash flows of principal and interest and profit from changes in value?

A)Amortized cost.
B)Equity method.
C)Fair value through other comprehensive income.
D)Fair value through profit or loss.

Question 75

What factor is important in classifying an investment at fair value through profit or loss?

A)Whether the instrument is a debt,equity or derivative instrument.
B)Whether the instrument has a set maturity date.
C)What is the business model within which the investments are held?
D)Whether the instrument generates dividends.

Question 76

Amacon Corporation has the following investments at December 31,2016:

If Amacon classifies its investment in DEF at fair value through OCI,what amount will be reported in other comprehensive income at December 31,2016?

A)$3,000 loss.
B)$3,000 gain.
C)$5,000 gain.
D)$30,000

Question 77

Amacon Corporation has the following investments at December 31,2016:

Amacon,whose year-end is Sept.30,purchased the share of Daisy on January 1,2015.If Amacon irrevocably elected to classify its investment in Daisy at fair value through OCI,what amount will be reported in other comprehensive income at September 30,2016?

A)$1,500 gain.
B)$2,500 gain.
C)$3,000 gain.
D)$19,500

Question 78

What should an investment in a debt investment be classified as when management has not specifically identified the classification? That is to say,in the absence of an election,what is the default category?

A)Associate.
B)Amortized cost
C)At fair value through OCI.
D)At fair value through profit or loss.

Question 79

Fisher Corporation has the following investments at September 30,2016:

What method of accounting will Fisher use to account for its investment in Cookstown if this investment is classified as an associate?

A)Amortized cost.
B)Equity method.
C)Fair value through other comprehensive income.
D)Fair value through profit or loss.

Question 80

Satellite Corporation has the following investments at December 31,2016:

If Satellite classifies its investment in Davenport at fair value through profit or loss,what amount will be reported for the investment at September 30,2016?

A)$1,000
B)$18,000
C)$19,000
D)$20,000